24 August 2010
Global Strategy
This material should be regarded as a
marketing communication and may have
been produced in conjunction with the RBS
trading desks that trade as principal in the
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Research Team
Global Strategy
www.rbsm.com/strategy
Global Views
The View Ahead: Real Fragility
Markets are feeling very vulnerable. You can't overstate what has happened in
the European morning; equity indices are down ~1%, but on the back of virtually
no data and following the weakish close in the US yesterday then it just feels like
weak data could give us a big break lower while stronger data can perhaps only
keep things in a holding pattern; the latter is especially true given the second
division nature of data out in the US later. Talking of which, it is worth pointing out
that our US economists expect a much stronger than consensus 4.85m figure for
Existing Home Sales later today.
Peripheral Europe has had a bad day widening out 3.5bp (our measure looks at
a weighted average spread of all other European bonds vs. Germany). Any
widening in this spread is bad news, but the most recent batch has at least been
'other Europe' bonds not rallying as fast as German bonds, rather than their
yields actually widening. Nevertheless, the spread at 169bp is just 11bp short of
it's wides in early May and late June and we need to watch very carefully as a
move above these recent wides should generate market speculation of more
action from the ECB.
Too soon to say what, if any, type of intervention that might generate, but more
timely intervention may come in FX land with USD/JPY breaking through 85.00
this morning, and breaking through the Nov-09 lows. Trade-weighted JPY has
rallied over 5% in the past month and must be beginning to concern policy
makers in Japan - it is certainly weighing on equities with the Nikkei struggling to
perform in line with regional peers at the moment. The JPY has had a fantastic
run in the recent bout of general risk weakness, but from here long bonds, and
short equities (in that order) look like better bets to play further weakness, with
the risk that intervention in Japan goes from passive to active. Andy Chaytor
Ahead today
US existing home sales, Jul (10:00 EDT): Sales should fall to 4.85m.
Central banks: 8:45 EDT Fed’s Evans speaks
G10 data calendar
EM data calendar
Overnight news
Euro area new industrial orders, Jun: new orders were up 22.6% over the
year, followed by an upward revision to last month’s print to 23.0%. Though,
today’s release was softer than consensus of 24.0%.
The Royal Bank of Scotland

Today’s views

Rates: Just get / stay long. Buy on dips is a strategy that isn't working. We

Global Strategy | 24 August 2010

continue to argue that while everyone tries to wait for a dip to buy, and so isn't
long (or at least long enough) of rates markets the rally can continue. We
continue to urge investors just to buy. Yes, yields look low on a historical basis
but that is no reasonable basis to avoid buying them and 1-handles are feasible
on benchmark 10y rates in core Europe. The DMO minutes released this morning
suggest there will be no long conventional syndication in September, and that is
supportive to our (beleaguered) long 30y gilts out of 30y bunds view.

FX: Momentum remains with the USD. A slightly iffy risk environment is also USD
positive. Having broken the 1.2730 range lows, the 1.2433 61.8% fibo
retracement level will have a natural pull for EUR/USD. GBP/USD’s move lower
overnight looks like a technical break of 1.55, with a negative UK outlook story in
the Times providing the fuel. The article doesn’t say anything we didn’t always
know. The EUR should catch-up, so short EUR/GBP as an intra-day trade offers
decent risk/reward.

Emerging markets NJA: With light flows, most Asian currencies are range-
bound. Thai bonds continued to rally. Buy the 5Y benchmark given flush liquidity
and positive supply factors, with the issue unlikely to be reopened over the next
two months. Alternatively, go long the swap spread given the risk that the BOT
might hike rates more aggressively than we envisage (EM Asia | Fixed Income
Monthly | Thailand). In China, Central Huijin sold CNY20bn of bonds each on the
7 and 20Y tenors as part of its CNY187.5bn issuance plan. The yield on the 7Y
came in nearly 11bp below expectations, underscoring the relatively flush
liquidity conditions. Stay received at the belly of the ND IRS curve. In Indonesia,
the statistics bureau said that annual inflation for August (due 1 September) was
likely to be above 6.5%, owing to higher rice prices. This is above the central
bank's target of 4-6% and is higher than July's print of 6.22%. Bonds initially sold
off, but closed relatively unchanged. Stay tactically long around the 20Y segment
given a positive supply outlook and high carry, but don’t add to the position for
the time being.

Emerging markets CEEMEA: Data releases on Tuesday all on the weak side of
expectations in South Africa (Q2 GDP) and Poland (retail sales). Large
domestically oriented economies like India, Brazil, Indonesia, Poland are all
showing signs of domestic cooling. Meanwhile, the global market backdrop is
looking fragile post Bernanke comments on 10th August, with expectations now
building that the one beacon of light Germany will also cool in Q3. Our fear is
that the coincident cooling in EM economies and contagion likely to be felt from
the global slowdown could push EM assets over the edge. Given flows continue
to pour into credit markets, our preferred way to play this is via FX and shorts in
this scenario include PLN, ZAR and HUF. The relative outperformers will be TRY
and CZK. In South Africa, we had weak Q2 GDP data (weak mining and
manufacturing) and on-going public sector strikes which are causing
widespread disruption, supporting our call for 75bp of policy rate cuts this year
and we like to receive rates across the curve.

Media

Economists question Bank stance on spending cuts - FT

Economic forecast is gloomy, Bank expert warns - The Times
Chinese Potash Bid Could Scupper Takeout Premium - WSJ

2
The Royal Bank of Scotland

Global Strategy | 24 August 2010

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